Grading Paulson and Bernanke 16 comments
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Over the past few days I conducted a snap poll on the performance of Messrs Bernanke and Paulson over the past year, i.e. the first year of the credit crisis. The poll was devised in order broadly to gauge (on a scale of 1 to 10) readers’ sentiments regarding the gentlemen’s actions during testing times.
In total about 400 people participated in the poll and responded as follows:
Bernanke’s grades were all over the show, with about 42.4% of the participants rating his performance above average and 57.6% expressing the opinion that he performed in the bottom half of the grading card.
Paulson, however, had the bulk of his grades in the low numbers, with as many as 30.1% of the participants giving him the lowest grade of 1. (Bernanke also had the majority of his grades in the lowest category - 18.0%.)
A particularly succinct comment on the “management” of the credit crisis was received from a reader, Wendy, neatly summarizing the actions (or lack thereof) involved in the whole debacle. As I by and large concur with her thoughts, I have decided to republish her paragraphs below.The performance of Bernanke and Paulson over the past year is a different question than their performance over their entire tenure.
The Fed deserves low pre-crisis marks for not using its regulatory authority to put a stop to egregious lending practices. Treasury -- and the SEC, OFHEO and FDIC, which you left out -- didn’t use their authority to try to bring state-chartered banks into compliance with national bank standards. They also didn’t make any attempt to force securitizers (banks, the GSEs, the ratings agencies and the investment community) to force mortgage brokers to meet realistic lending and rating standards before the loans were bought, securitized, and sold to investors. They didn’t (and still haven’t) forced banks to put risky SIVs (structured investment vehicles) onto their balance sheets. They allowed (and still allow) banks and investment banks to use internal models to “mark to fantasy” (Level 3) and allow the enormous market for credit default swaps to be unregulated, opaque, and the recordkeeping not current.
By ignoring the foundations of the crisis, even as the cracks were forming and propagating, the Fed, the Treasury, the SEC, the FDIC, OFHEO and the bond rating companies all deserve an F.
However, since the crisis broke, a year ago, their performance has been much better.
Bernanke and Paulson have both been very active. Importantly, they have collaborated more than any Fed and Treasury heads that I can remember.
They have both actively tried to prevent a panic, by jawboning constantly in a clear and balanced way. Without their involvement, the financial structure would have shuddered, and possibly crumbled, several times in the past year.
I give Bernanke high marks for using unconventional moves, such as lending Treasuries with Level 3 securities as collateral to unregulated investment banks (possibly illegal, but it’s easier to ask for forgiveness than permission). Such moves increase liquidity and keep the financial system from seizing up, without the knock-on effects that the Fed’s previous tool — the Fed funds rate — would have (most notably, by impacting the dollar).
I give Paulson medium marks for trying his darnest to talk the dollar up, giving the Fed’s medicine of interest rate cuts time to work through the economy. Also, I give Paulson high marks for trying so hard to alleviate the SIV crisis (although it didn’t work).
However, I downgraded Paulson’s mark because I think his proposal to make the US taxpayer the bagholder for the GSEs is a terrible mistake and a very bad precedent.
Ultimately, I gave Bernanke a high grade and Paulson an average grade, although these certainly aren’t average times.
The entire regulatory regime of the US financial community requires the largest overhaul since the Great Depression. Regulations that have been gradually repealed need to be put back into place. However, since so many new financial tools have been developed, the whole system needs to be rethought. This must include the Fed, Treasury, SEC, FDIC, the GSEs, and the governmental housing agencies (GNMA, the FHA). The state regulators must also be involved, since many of the most egregious practices happened on the state level, not regulated by any federal agency.
To accomplish this while preventing an outright financial crisis is like trying to repair an aircraft that is sporadically losing aileron control while trying to set up final approach in turbulence.
Not to mention that the US is in the middle of a Presidential election. Whichever side wins, there will be a big change in the cast of characters, especially the Agency heads (Treasury, SEC, FDIC, and FHFA, which is the new agency that will be doing OFHEO’s job to regulate the GSEs) during these unsettled times.
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This article has 16 comments:
Did you insert these pictures into the poll Mr. Du Plessis? If you did, your research result is completely meaningless.
it doesn't take genius to slash interest rates rates into negative territory and leave them there. neither is it smart. exactly what have low rates done for us except destroyed returns for safety-minded investors. it hasn't spurred lending...it hasn't decreased mortage rates, which are higher than when the crisis began. as for the lending facilities, why should anyone consider it an accomplishment to foist bad paper onto the taxpayers and in return for good paper to the morons who nearly brought down the financial system with their greed.
we'd have better off to let it burn. we'd have hit bottom faster and recovered faster than will now be possible with their endless bandages applied to a terminal ill patient...the system of cheap and plentiful credit to which our economy has become beholden.
all these morons have done is bought time. the outcome remains uncertain.
I think the Treasury could have enforced existing standards and regulation more strictly -- just the same as they could have identified the excesses in Enron and others.
Problem is no one really knows the next big thing until it becomes the next big mistake (same goes for bubbles). I don't think anyone wants the govt to get into that business because the certain result is lost opportunity.
Therefore the govt has to play cleanup when these things happen. And they are doing a decent job of it. Hopefully things won't get too far into the blame cycle, but it's an election year so it's hard to predict.
It is interesting to see the automotives start to come hat-in-hand to the govt. The thing is, that's missing the point. According to his operating beliefs, Bernanke needed to bolster the financials to stop a collapse in money supply (it remains to be seen if he has yet done enough). The govt doesn't have to save industry X versus industry Y. That's the market's job.
And evidently we are too stupid, because we're letting them get away with it. Fool me once, shame on you, fool me twice, shame on me.
Wall Street is an insider's game, and the FED, Treasury, SEC and all their assorted sycophants and minions are nothing more than shills and supporters of the cause, which is namely to quietly separate as much capital as possible from the little guy. Those guys got away with murder, and for their CRIMES they are being rewarded with a free trip to the discount window where they received hundreds of billions of dollars of taxpayer monopoly money that DOESN'T get lent overnight, DOESN'T shore up their depleted capital structure, DOESN'T go to any worthwhile economic purpose whatsoever.. instead it goes straight into their trading accounts, and the trading accounts of the hedge funds they spawned, and these guys have all now become the largest day traders on earth, adrenalin junkies whose sole purpose is to just whip these markets back and forth, back and forth, skimming a little on the way up, and a little on the way down, as the orchestra plays the last waltz and the fat lady applies her makeup.
Who would want their job?
And finally what do you think you would have done differently?
It is far easier to judge than to do something that you know you will be judged for the rest of their lives. They did and do their best as would be expected of them.
It is amazing that no one really complained until they started to see their false wealth disappear when it was realized that the loans would have to be paid back.
John McCain has been rehabilitated after his involvement in the S&L failures that cost tax payers billions of dollars. Even though he received money from his very close criminal friend, Charles Keating, it seems that all is forgiven. America never ceases to amaze me!